Russia is burning through its dollar stockpile

Vladimir Putin in 2011.
Maxim Shipenkov/Reuters
Russia's foreign-currency reserves slipped another $6.4 billion last week as the central bank and the finance ministry continue the battle to prop up the ruble. At that rate, the country's remaining $368.3 billion will be all but gone by this time next year.

Russia's reserves have fallen by more than $100 billion, from $469.9 billion in June, as the collapse in global oil prices sent the Russian currency tumbling.

Russia relies on oil and gas revenue for about 10% of GDP and half of federal budget revenues, so when the price falls, so does the economy.

Morgan Stanley estimates that "every $10 fall in the oil price means a $32.4 billion fall in oil and gas exports, which is equivalent to about 1.6% of GDP" and about a $19 billion fall in government budget revenues.

To protect the country's businesses from the collapse in the value of the ruble (falls in the currency increase the cost of imports and foreign-currency debt), the central bank and the finance ministry have been selling dollars and euros and buying up rubles to prop up the latter's price. While this helped to stabilise the currency, the falls have already thrown Russia's banking sector into crisis and forced the government to cut its budget by 10% this year.

The big question now, however, is why Russia still has to burn though foreign-currency reserves when the oil price appears to have bounced back from its recent lows.

The Bank of Russia told the Russian news service TASS: "The reduction of international reserves for the week by $6.4 billion, or 1.7%, is a result of repo transactions in foreign currency and reduced balances on the Russian finance ministry and with the Bank of Russia, as well as the negative balance of foreign exchange and market revaluation."

That suggests the currency remains under pressure and, even at over 62 rubles to the dollar, it may still be above what the market feels is fair value. If the oil price is set to remain structurally lower, this is a battle the central bank is unlikely to win and could simply mean it is throwing money away rather than letting the currency find its own level.

And that's a problem. If the falls continue at about $6 billion a week, they will be all but exhausted by this time next year. However, at least one key threshold — sufficient reserves to cover at least six months of imports in case of emergency — may have already been breached.

Six months of Russia's imports are worth approximately half of the current level of international reserves, which are valued at around $454 billion. If we subtract the reserves used to insure the government's budget, the remaining value of reserves only slightly exceed the amount needed to pay for six months of imports.

Some analysts say six months is the critical level to insure the Russian population against the possibility of severe hardship in case the crisis deepens and the Russians are deprived of foreign goods. (Russia imports a large number of staples including butter, cheese, and meat.) Though imports are likely to contract by as much as 30% in 2015 because of the country's recession but with the level of reserves likely to continue to fall for the next few years we could cross even a much reduced total.